(Dec 2): The Bank of England (BOE) warned that a multi-trillion-dollar spending boom in artificial intelligence (AI) infrastructure financed by debt risks unravelling given “materially stretched” stock market valuations.
The UK central bank said on Tuesday that a correction in AI stocks would spill over to wider debt markets and pointed to early warning signs in credit default swaps of companies leaning on debt to fund their investments.
While currently investment in the technology is mostly driven by cash held by “hyperscalers”, it said around half of the expected US$5 trillion ($6.49 trillion) of AI spending over the next five years will be financed externally, largely through debt.
In its twice-yearly Financial Stability Report, the BOE said that a sharp fall in stock valuations could hit UK household wealth, feeding through to consumer spending. It would also trigger losses on lending to firms investing heavily in AI infrastructure, ramping up borrowing costs for companies more widely.
It’s the latest warning about a possible AI bubble collapsing, with some drawing parallels with the dotcom boom that burst in stock markets in the early 2000s. As concerns build that valuations are reaching irrational levels, firms are investing heavily in AI infrastructure, such as building out the data centres needed for the technology.
However, BOE governor Andrew Bailey said AI-focused firms are at least recording positive cash flows, unlike the early internet companies.
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“They are not created on hope but as we see and we were seeing it last week, I think in the debate is Google moving onto Nvidia’s patch, it doesn’t mean to say everybody’s going to win. It doesn’t mean to say everybody’s going to win equally,” he told a press conference in London.
The BOE estimates that AI has driven two thirds of this year’s gains on the S&P 500 index and investment in the technology was behind half of US economic growth in the first half of 2025.
“The financing of AI development is reaching an inflection point,” the BOE said. “If material credit losses on AI lending were to occur [directly or indirectly], this could have spillovers to broader credit conditions including in the UK.”
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The central bank said there has recently been rising corporate debt issuance by AI companies and pointed to some warning signs building.
“The five-year credit default swap spreads of Oracle — an AI company which has lower free cash flow margins than some other larger hyperscalers and has issued a large amount of debt this year to finance AI infrastructure spending — has widened from less than 40 basis points to around 120 basis points since end-July,” it said.
That contrasts with the steady spreads of US investment-grade corporates more broadly. Credit default swaps insure against a company defaulting on its debts.
Oracle Corp, the database and cloud giant that’s a major client of Nvidia Corp, has emerged as a barometer for AI risk. Sceptics have piled into its credit-default swaps (CDS) as a hedge against a crash, betting that CDS prices will rise as investor sentiment on the tech cools.
Nvidia is the world’s most valuable company with a market capitalisation of US$4.37 trillion. Its share price has been driven by demand for its chips, used to power the most cutting-edge AI models.
It has struck billions of dollars of deals over the past year to shore up its own customers, partners and even its rival Intel Corp. Those tie-ups have raised concerns of an AI bubble, with the deals inflating the market and tying the fates of several players together.
Uploaded by Tham Yek Lee
